US President Donald Trump has announced a new 100% tariff on all goods exported from China to the US. This move comes in response to China’s stricter licensing rules for rare earth minerals. However, implementing this tariff will be tough since the US government is currently shut down over funding issues. American markets are closed for the Columbus Day weekend, but we expect changes when they reopen. Treasury yields rose before the market closed. Tariffs are fees on imports designed to help American producers compete, unlike taxes that are paid upon purchase. Tariffs are paid when goods enter the country, while taxes are collected from consumers and businesses.

Economists’ Views on Tariffs

Economists have different opinions on tariffs. Some believe they protect local industries, while others argue they raise prices and may lead to trade wars. Trump’s goal with these tariffs is to support the US economy and reduce income taxes. In 2024, Mexico, China, and Canada accounted for 42% of US imports, with Mexico as the largest supplier. Trump is focusing on these countries for future tariff actions. With markets reopening on Tuesday, October 14th, we should expect a big increase in volatility. The CBOE Volatility Index, or VIX, which was near 18 last week, could rise above 30 as traders prepare for this new tariff threat. We saw similar volatility spikes during the 2019 trade war, where the VIX surged more than 40% in one week. Investors should consider buying put options on indices heavily reliant on Chinese supply chains, especially the Nasdaq 100. Major companies like Apple and semiconductor firms reported that over 75% of their manufacturing and assembly stays in China, making them particularly sensitive to a 100% tariff. Selling futures on the E-mini S&P 500 is another strategy to protect against the expected market downturn. In the currency markets, we anticipate the Chinese Yuan (CNH) to weaken against the dollar, possibly reaching around 7.50 from its current level of 7.28. The Australian dollar, often seen as a barometer for the Chinese economy, may also decrease in value. Investors are likely to seek safer currencies, strengthening the US dollar and Japanese Yen against many others.

Commodity Market Outlook

Commodities are at high risk, and we can look to past events for clues. When retaliatory tariffs were introduced in 2018, China targeted US agricultural products, leading to a drop in soybean futures by over 20%. Following recent recovery in US soybean exports to China, we should anticipate a similar negative response and consider shorting agricultural futures. Now is a good time to invest directly in volatility, not just to hedge against it. Buying call options on the VIX or investing in VIX futures provides direct exposure to rising market anxiety. The price of options will likely increase significantly on Tuesday morning, so it’s crucial to make these trades early to capitalize on the changing risk. We must also factor in the uncertainty from the ongoing US government shutdown. This complicates the immediate enforcement of the new 100% tariff, which may cause sharp fluctuations in the market as traders evaluate the situation’s reliability. Therefore, any positions taken should be closely monitored, as political developments could lead to quick reversals. Create your live VT Markets account and start trading now.

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